Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

Wellington…still growing sluggishly

There was an annoying story on the front page of the Dominion-Post this morning. The online version of the story is headed “The big squeeze: Wellington’s population could almost double in the next 30 years”, a proposition which appears to be based on nothing more than compounding last year’s estimated population growth for the Wellington city area. I suppose anything could happen. The annual immigration target could be doubled or trebled, central government could go on a massive expansion path, or the private sector could discover hitherto untapped opportunities in Wellington.

But if Wellington has outstripped Dunedin over the years, it has hardly managed strong growth. I went back to my 1913 New Zealand Official Yearbook. Back then, greater Wellington made up 17 per cent of the total population of the 14 large urban areas (a group made up of the places that were largest then, and those which are largest now – eg in 1913 Hamilton and Tauranga barely figured, while Gisborne and Timaru did). Today, the population of greater Wellington (including Kapiti) is about 14 per cent of the population of those 14 urban areas.

More recently, SNZ reports estimated data for urban area populations from 1996 to 2015. Over that period, even Wellington city’s population growth has only slightly exceeded population growth for the country as a whole – and been ever so slightly slower than population growth in Nelson. Take the greater Wellington area and population growth has been slower than that in greater Christchurch, despite the massive disruption from the earthquakes.

I’m not sure that this should greatly surprise anyone. Wellington has been helped by the growth of government (the regulatory state needs staff and it keeps growing, even if the tax share in GDP doesn’t) and by happening to have industries which it remains fashionable to subsidise (the film industry). On the other hand, it has a somewhat bracing climate – albeit one staunchly defended by some true Wellingtonians. There have been some good market-driven businesses built here, but not many choose (and find it optimal) to stay in the longer-term.

Average GDP per capita in Wellington is higher than that in New Zealand as a whole – no doubt reflecting some combination of the huge number of professional government and government-dependent roles, and the fact that Wellington tends to be attractive to young people not old ones (it is windy and not very warm). The labour force participation rate in Wellington averages higher than those in, say, Auckland and Christchurch. But over the 15 years for which we have regional GDP data, average per capita GDP in Wellington has been growing more slowly than that in the rest of the country (a similar story to Auckland).

So I don’t really see much chance that the population of Wellington – even just that of Wellington city – is going to double over 30 years. Even the Wellington City Council’s “chief city planner” (shouldn’t anyone from outside the old eastern-bloc be embarrassed to hold such a title?) acknowledges it is unlikely.

But the focus of the Stuff article was on the Wellington housing market. Of course, since it is an article about local authorities perhaps it isn’t too surprising that the word “market” does not appear at all – not once in a reasonably substantial article. The Council’s British chief bureaucrat, Kevin Lavery, is quoted instead as saying

Lavery said the 15 people who find themselves sitting around the Wellington City Council table after October’s election will have some big decisions to make on the supply, quality and diversity of housing in the capital.

Which really sums up all that is wrong with our system of local government. Councils and their officials simply should not be in the business of making decisions on the “supply, quality, or diversity” of housing in the city. That is what we have – or should have – markets for. They are the mechanisms through which private tastes and preferences are reflected and private businesses respond to that (actual and anticipated) demand. We need local authorities to do things like pave the streets, manage the water and sewerage, provide parks, and perhaps even run libraries. We don’t need them deciding what sort of houses people are living in and where The problems – including the affordability problems – mostly arise when officials and councillors get in the way. Now if Mr Lavery had simply been noting that no one can really predict what future population growth rates will be, or where people and businesses will prefer to operate, and that Council rules need to be sufficiently minimalistic and flexible to enable housing supply to easily respond to emerging demand, I’d have applauded him. But no, he doesn’t see a dominant role for the market, but for 15 elected individuals, with neither the expertise nor the incentives to get those decisions right – and that is no criticism of them individually, no one has that knowledge.

But the “chief city planner” is worried.

The danger was that developers would concentrate more on packing people in than on good design. “We’re not out to generate developments and profit margins for developers. We’re building communities.”

Council bureaucrats are “building communities”? The mindset is really quite starkly on display. In market economies, profit margins are part of what makes people willing to take risks, and build businesses – even develop new subdivisions or apartment blocks – taking the risk that things might actually go badly wrong. But “profit margins” seem anathema to the chief planner. And “good design” seems mostly to be a mantra to impose the tastes of some on everyone, and raise costs of housing. Again, why is it a matter for local government?

It isn’t just the bureaucrats. Here is our Mayor, presumably somewhat torn between her Green Party credentials (supposedly sceptical of population growth) and her local authority boosterism.

Wellington Mayor Celia Wade-Brown said she believed her council had done plenty during her six years in charge to set the city up for a population boom.

It had signed off on a number of special housing areas with the Government, and was actively consulting communities in several suburbs on potential medium-density housing rules.

Establishing an Urban Development Agency this year would also help increase the city’s housing stock and keep prices in check, she said. The agency will be able to buy and assemble land parcels, and partner with developers.

It is all about bureaucrats and politicians, not at all about empowering markets. Nothing about respecting property rights or promoting market solutions – just put your trust in the Mayor and Council staff. I’m wryly amused by her references to SHAs. There are a few not far from here. One – on the site of an old church – now has a few townhouses almost completed. A much larger one, not 200 metres from where I sit, remains as overgrown, dark, brooding, and undeveloped as ever. I’m keen to see it developed – though I know many locals aren’t – but there is simply no sign of any progress.

I guess the election is coming up and the incumbent isn’t well-positioned but when she can end with the observation that

“When our average house price is $560,000 and the Government considers $600,000 to be affordable in Auckland, then I think our city is looking pretty good.”

it is as if very small ambitions indeed have triumphed.

One only has to fly over Wellington to realise just how much land there is in both Wellington city, and the greater Wellington area. No doubt, the development costs are higher than those for flat cities such as Hamilton, Palmerston North or Hastings. But there is little excuse for average house prices of $560000 – responsibility for that mostly rests with the mayor, councillors and their legion of planners, aided and abetted by central governments that have allowed councils to have such powers.

The Productivity Commission’s draft report on a new urban land use policy framework is apparently due out next month. They had a mandate to be ambitious in their proposals. The Commission has so far shown a disconcerting enthusiasm for giving more powers to councils and governments, not fewer (they are bureaucrats themselves, so perhaps even if disappointing it shouldn’t be so surprising). I hope they take seriously the possibility of largely withdrawing the state (central and local) from the urban planning business. There was a nice piece the other day from a US commentator, Justin Fox, marking the 100th anniversary of zoning in New York.

It also appears to have been the first set of land-use rules in the U.S. that (1) covered an entire city and (2) used the word “zone.”

That was 100 years ago Monday. So happy birthday, zoning! OK if we kill you now — or at least maim you?

There’s a thought. Put markets, and private contracts, back in the driver’s seat, and let local authorities respond to private sector developments, efficiently delivering the limited range of services we really need councils to provide. Don’t “plan communities”, but provide services to ones that develop. (And that doesn’t include airport runways.)

I guess ACT has not yet thought through how to (a) get local governments restricted to doing the drains and roads, while (b) protecting existing residents’ sense of reasonable rights/interests. They start to talk about (a) but the Epsom voters get very restless (as with school choice). I’ve been running recently the idea – and have heard Rodney Hide argue for something similar – for a system in which the key aspects of the current zoning/planning schemes are handed over as property rights to existing owners (in groups of maybe 500 houses) and from there the market could take over. Collective action provisions (requiring say 80% agreement to change) would limit extreme holdout problems, while allowing neighbourhoods to choose collectively, but on a small scale, the character of their area. Some enclaves might never agree to change, but otherwise will happily vote for change if the prospect of a higher property value is on offer. And the choice would be made locally, not made by councilors or judges waving a wand and landing rather arbitrarily on this suburb or that. That provides both agency/direct control, and removes power from local authority politicians.

This concept does assume that all areas have a similar amount of infrastructure. Development opportunities tend to follow where the infrastructure goes. It still gets down to who pays for infrastructure?

I’m not sure that is right, but am feeling my way here. Aren’t there plenty of examples in times past of towns/suburbs developing and the infrastructure following it? If we either make developers responsible for the provision of basis infrastructure, or mandate councils to provide it (at true cost), we give the freedom for the market to develop.

I’ve slowly come to the view that politicians require a minimum ‘sphere of direct control’, in order to feel relevant and have something of value to hand to their supporters. In the 50s it was deciding who got freeways, telephone and electricity connections, these days its education and health care budgets and urban planning policies.

But more generally, I like the gist of your proposition. You are however talking about unwinding a lot of history in urban land use planning (a fine if ambitious goal). This begins to remind me of the great policy leaps made in the 90s with ringfenced economically regulated utilities. That was effectively the genesis of a whole new school of economic theory – but a whole new school of economic theory was required to handle the magnitude of the problem at the time (see Jean Tirole’s Nobel Prize as an example). There’s a whole opus of work needed here, to explain exactly how the system is supposed to work, especially to explain it to a reluctant audience. If you can find a ready and willing audience, you might be on to something really useful.

You are right about it being an ambitious goal, and in my calmer moments I remain deeply pessimistic about prospects for change (since nowhere else has managed to unwind the sort of morass we have). The parallel with utilities regulation is an interesting one.

I don’t have the time or expertise to develop the idea in great detail, but will keep on putting it out there from time to time, and reflecting a bit more on it myself, partly in view of the forthcoming Productivity COmmission report on better models for urban land use regulation.

Perhaps a small start, re Councils, would be to cut their salaries and allowances, to make being a councilor much less of a fulltime job than it has seemed to be becoming in cities. I don’t suppose it would work – would just self-select those who could afford to spend lots of unremunerated time on it and the most power-hungry or “visionary”, and perhaps lead to even more power flowing down to the salaried bureaucrats. It takes a real mindset change, and Western societies don’t seem to have an appetite for materially smaller govt – it isn’t just agency theory that explains why large govt is so prevalent.

Len Brown forked out $2 billion dollars for rail loop from Britomart to Mt Eden. Who is responsible for paying for that? Under your scheme, Mt Eden residents would have to pay because they would be the most likely users to get into the CBD. It is unlikely CBD residents would need to travel to Mt Eden when there is not even a decent shopping mall in Mt Eden.

I agree with the idea of trying to reduce the influence of councillors and planners, and instead rely on the market to solve the problems.

But from my own experience over the last year or so in Wellington, I don’t think the reality has been too bad. I’ve had a couple of townhouses built as in-fill housing. The rules were known in advance, and there was no real issue from WCC. They gave approval even with a couple of minor breaches. The guidance from the architect was to avoid doing anything that needed consent from neighbours etc.

So I think the system is ok for doing things within the existing rules, the difficulty is projects outside those rules. This makes the comments of the chief planner almost a bit strange – people can do a lot of stuff now without really needing the planners to do anything more than tick a few boxes and confirm that a plan conforms to the rules.

Another aspect is the value of the finished development. Based on house values from 18 months ago, the whole project was a bit marginal. So although I agree that the Mayor’s comment about the 560k avg value is far from aspirational, at lower values it would not have been worthwhile for me to proceed. So I don’t understand how you can make the comment that there is little excuse for average values of 560k.

my observation was just about the benchmark price to income ratio of around 3 – Wgtn’s are somewhere around 5 to 6. Land is just much more expensive than it should be in a deregulated system of urban land use.

I take your point on things happening within the existing rules – altho the builders I have doing alterations on my house tell me a slightly different story (earnest well intentioned bureaucrats, not even overly inflexible, but tied down by all sorts of legislative constraints – but the real issue for transforming housing affordability is about where the rules are set in the first place (and even the ability of councils to set them).

Re price to income etc. My experience is that it would be difficult to build for a 3 to 1 ratio.

I’m not sure of the numbers, but if the current Wgtn ratio is about 5 or 6, and the avg/median value is 560k, then the income must be about 100k, so would imply a target house value of 300k. I believe build costs are 3-4000/m2. If we factor in all the other costs, such as architects/design fees (I would say we don’t really have any flat land in Wgtn that would allow a generic design), then getting a house built for 3000/m2 would be a real challenge. But even if we used a $3000/m2 rate for a new house, then the house would be only 100m2, hardly what most NZers would regard as an average house size. And that implies that land has a value of $0.

So 3 to 1 might be the right ratio, but we can’t build at that price, and if we could the land would still have no value.

Presumably building an entire subdivision would be cheaper, but I would question whether an entire subdivision could be profitably developed at 3 to 1 unless the developer got the land for free.

Interesting comments thanks Lindley. I had been wondering – in the deep recesses of my mind – about that point, but had no data to go on. Perhaps it goes to the question of why NZ construction costs seem so high – which is, of course, a quite different issue from land use regulation.

Of course, the value of unimproved land on the periphery of a city should probably be pretty low. If a hectare is worth $40000 in agricultural use – high for many uses – then even a 70 sq m section (plus roads, parks etc) doesn’t involve much cost in unimproved unregulated land.

I am currently completing a 3 site subdivision on currently a 2 site cross lease. Public drainage is the responsibility of the developer. The cost of that public drainage is $50k but the incredible delay is that the drainage engineer has to sign off and he is playing silly buggers. 8 weeks so far just waiting for him to sign off. I think some engineers like that feeling of power. The entire project is held up waiting for 1 person to approve the public drainage.

The second hand 4 bedroom house(130sqm) cost me only $25k to buy plus $50k to relocate but the earthworks/retaining and public & private drainage requirements just to get a 3rd house on a site with already 2 houses is so far $250k

I’m glad you mentioned that dilapidated spooky old school. That thing is such an embarassment. Makes me crazy that people are agitating to have it kept, especially when the developer who owns it intends on keeping the chapel aka the only bit of it worth not demolishing.

I think you’d find starting a brand new city which had the freedom to apply these kinds of deregulated urban land use rules would be easier than trying to change existing rules. There’s a lot of existing interest groups who aren’t incentivised to agree with you – but in a new city it might be possible to prove your point by example (even though there would be near universal agreement that your idea was a bad one in the beginning).

Nobody had particularly high hopes for Hong Kong or Singapore, but now those two cities find themselves as an example for policy makers in China and elsewhere.

That said, there’s lots of unregulated urban land use markets in the world (Atlanta? or Austin?), but nobody in Australia or NZ seems all that interested in copying that lesson either though. An example closer to home might make it easier to change minds.

Why would we want to copy Hong Kong or Singapore and not Atlanta or Austin?

Hong Kong has 26,000 people per square kilometer and a house price median multiple of 16, and Atlanta has 600 people per square km and a median multiple of 3.

How do Kiwis really want to live????

I don’t know how fast HK is growing, but Atlanta grew from 3.5 million people in 2000 to 4.5 million people in 2010, which is about twice as fast as Auckland is growing. In the USA, there is a correlation between the fastest growth, and housing affordability – the latter is causative of the former.

The multiplier effects in the real economy are significant when you have credit expansion all going into actually building stuff and providing jobs. Not to mention the refinancing of existing debt, and the short average time taken to pay off a mortgage, and have more and more discretionary income looking for things to be spent on.

I think we’ve just looped back to an earlier discussion about new cities. I think you are right, but it would be very hard to do because existing economic activity is where it is for a reason and a whole new city on, say the Hauraki Plains would struggle to become self-sustaining.